Internal Revenue Bulletin:  2007-4 

January 22, 2007 

Rev. Proc. 2007-16


SECTION 1. PURPOSE

This revenue procedure provides an automatic consent procedure allowing a taxpayer to make a change in method of accounting under § 446(e) of the Internal Revenue Code for depreciable or amortizable property (hereinafter referred to collectively as “depreciable property”) after its disposition. This revenue procedure also waives the application of the two-year rule set forth in Rev. Rul. 90-38, 1990-1 C.B. 57, for certain changes in depreciation or amortization (hereinafter referred to collectively as “depreciation”). This revenue procedure clarifies, modifies, amplifies, and supersedes Rev. Proc. 2004-11, 2004-1 C.B. 311. This revenue procedure also modifies Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, and amplified, clarified, and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432), and other revenue procedures to conform with § 1.446-1(e)(2)(ii)(d) of the Income Tax Regulations.

SECTION 2. BACKGROUND AND CHANGES

.01 Section 446(e) and § 1.446-1(e) provide that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner of Internal Revenue before changing a method of accounting for federal income tax purposes. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of accounting.

.02 On January 20, 2004, the Internal Revenue Service published Rev. Proc. 2004-11, which provided an automatic consent procedure allowing a taxpayer to make a change in method of accounting under § 446(e) for depreciable property after its disposition. Rev. Proc. 2004-11 also waived the application of the two-year rule set forth in Rev. Rul. 90-38 for certain changes in depreciation. In addition, Rev. Proc. 2004-11 modified Rev. Proc. 2002-9 and other revenue procedures to conform with § 1.446-1T(e)(2)(ii)(d) of the temporary Income Tax Regulations.

.03 Concurrent with the issuance of this revenue procedure, §§ 1.446-1(e)(2)(ii)(d) and 1.1016-3(h) have been promulgated. Section 1.446-1(e)(2)(ii)(d) identifies the changes in depreciation that are (and are not) considered a change in method of accounting. Section 1.1016-3(h) provides that for purposes of determining whether a change in depreciation is a change in method of accounting under § 446(e), the “allowed or allowable” rule under § 1016(a)(2) will not be considered to permanently affect a taxpayer’s lifetime income.

.04 In general, if a taxpayer uses an impermissible method of accounting in two or more consecutively filed federal tax returns the taxpayer has adopted a method of accounting. See Rev. Rul. 90-38. The Service and Treasury Department recognize that with respect to changes in depreciation this two-year rule may increase administrative and compliance costs because many taxpayers changing from an impermissible to permissible method of accounting for depreciation used the impermissible method for depreciable properties placed in service in the taxable year immediately preceding the year of change. Accordingly, in the interest of sound tax administration, the Service and Treasury have decided to waive the two-year rule in Rev. Rul. 90-38 for a change in depreciation to which § 1.446-1(e)(2)(ii)(d) applies.

.05 If depreciable property is transferred in a transaction in which the transferee is treated as the transferor for purposes of computing the depreciation allowance for the property with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted depreciable basis in the hands of the transferor (for example, in transactions subject to § 168(i)(7) or § 381(c)(6)), the transferee may file a Form 3115, Application for Change in Accounting Method, to change from an impermissible method of accounting adopted by the transferor for that portion of the basis of the property to a permissible method of accounting for depreciation for the same portion of the basis of the property, provided the impermissible method of accounting for that portion of the basis of the property has not been changed by the transferor (through filing, for example, a Form 3115 or an amended return) or by the Service upon examination of the transferor’s tax returns. In this case, the § 481 adjustment will include any necessary adjustments since the property’s placed-in-service date by the transferor.

.06 The significant changes to Rev. Proc. 2004-11 include:

  1. The application of section 3 is extended to allow a taxpayer to file a Form 3115 with an original federal tax return for the taxable year in which the depreciable property is disposed of by the taxpayer that claimed less than the depreciation allowable for that property.

  2. A new section 4.01 is added, clarifying that a change from an impermissible method of determining depreciation for depreciable property in two or more consecutively filed federal tax returns is a change in method of accounting under § 446(e) and § 1.446-1(e).

  3. A new section 6.03 is added, extending the application of section 3 of this revenue procedure to dispositions of depreciable property occurring in taxable years ending before December 30, 2003.

.07 The significant changes to Rev. Proc. 2002-9 include:

  1. Section 2.01 of the APPENDIX of Rev. Proc. 2002-9 is changed to clarify that section 2.01 of this APPENDIX does not apply to any property for which a taxpayer is revoking a timely valid election or making a late election under § 179, or to any change in method of accounting involving a change from capitalizing and depreciation the cost or other basis of any property to deducting the cost or other basis as an expense.

  2. Section 2B of the APPENDIX of Rev. Proc. 2002-9 is changed to remove section 2B.03, which provided that the change under section 2B does not apply to a change in useful life under the method described in section 5.01(2) or 6.01(2) of Rev. Proc. 2000-50.

SECTION 3. METHOD CHANGE PROCEDURE FOR DISPOSED DEPRECIABLE OR AMORTIZABLE PROPERTY

.01 Scope.

  1. Applicability. Except as provided in section 3.01(2) of this revenue procedure, section 3 of this revenue procedure applies to a taxpayer that is changing from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation for any item of depreciable property subject to §§ 167, 168, 197, 1400I, 1400L(c), to former § 168, or to any additional first year depreciation deduction provision of the Internal Revenue Code (for example, § 168(k), § 1400L(b), or § 1400N(d)):

    1. that has been disposed of by the taxpayer during the year of change (as defined in section 3.02(3)(b) of this revenue procedure); and

    2. for which the taxpayer did not take into account any depreciation allowance, or did take into account some depreciation but less than the depreciation allowable (hereinafter, both are referred to as “claimed less than the depreciation allowable”), in the year of change (as defined in section 3.02(3)(b) of this revenue procedure) or any prior taxable year.

  2. Inapplicability. Section 3 of this revenue procedure does not apply to:

    1. any property to which § 1016(a)(3) (regarding property held by a tax-exempt organization) applies;

    2. any property for which a taxpayer is revoking a timely valid depreciation election, or making a late depreciation election, under the Code or regulations thereunder, or under other guidance published in the Internal Revenue Bulletin (including under § 13261(g)(2) or (3) of the Revenue Reconciliation Act of 1993, 1993-3 C.B. 1, 128 (relating to amortizable § 197 intangibles));

    3. any property for which the taxpayer deducted the cost or other basis of the property as an expense; or

    4. any property disposed of by the taxpayer in a transaction to which a nonrecognition section of the Code applies (for example, § 1031, transactions subject to § 168(i)(7)(B)(i)). However, this section 3.01(2)(d) does not apply to property disposed of by the taxpayer in a § 1031 or § 1033 transaction if the taxpayer elects under § 1.168(i)-6T(i) and (j) to treat the entire basis (that is, both the exchanged and excess basis (as defined in § 1.168(i)-6T(b)(7) and (8), respectively)) of the replacement MACRS property (as defined in § 1.168(i)-6T(b)(1)) as property placed in service by the taxpayer at the time of replacement and treat the adjusted depreciable basis of the relinquished MACRS property (as defined in § 1.168(i)-6T(b)(2)) as being disposed of by the taxpayer at the time of disposition.

.02 Change in method of accounting.

  1. Change made on original return for year of change. On its timely filed (including extensions) original federal tax return for the year of change (as defined in section 3.02(3)(b) of this revenue procedure), a taxpayer within the scope of section 3 of this revenue procedure may change from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation for any item of depreciable property within the scope of section 3 of this revenue procedure, provided the taxpayer files the original Form 3115 in accordance with section 6.02(3) of Rev. Proc. 2002-9 (or its successor).

  2. Change made on an amended return for year of change. On an amended federal tax return for the year of change (as defined in section 3.02(3)(b) of this revenue procedure), a taxpayer within the scope of section 3 of this revenue procedure may change from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation for any item of depreciable property within the scope of section 3 of this revenue procedure, provided:

    1. the taxpayer files the original Form 3115 in accordance with section 3.02(3)(c) of this revenue procedure prior to the expiration of the period of limitation for assessment under § 6501(a) for the taxable year in which the item of depreciable or amortizable property was disposed of by the taxpayer; and

    2. the taxpayer files an amended federal tax return for the year of change (as defined in section 3.02(3)(b) of this revenue procedure) that includes the adjustments to taxable income and any collateral adjustments to taxable income or tax liability (for example, adjustments to the amount or character of the gain or loss of the disposed depreciable or amortizable property) resulting from the change in method of accounting for depreciation made by the taxpayer under this section 3.

  3. Application Procedures. A taxpayer making a change in method of accounting under section 3 of this revenue procedure must follow the automatic change in method of accounting provisions in Rev. Proc. 2002-9 (or its successor), with the following modifications:

    1. The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply. If the taxpayer is under examination, before an appeals office, or before a federal court at the time that a copy of the Form 3115 is filed with the national office, the taxpayer must provide a copy of the Form 3115 to the examining agent, appeals officer, or counsel for the government, as appropriate, at the time the copy of the Form 3115 is filed with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the examining agent, appeals officer, or counsel for the government, as appropriate.

    2. The year of change is the taxable year in which the item of depreciable property was disposed of by the taxpayer.

    3. If section 3.02(2) of this revenue procedure applies to the taxpayer, section 6.02(3)(a) of Rev. Proc. 2002-9 is modified to require the original of the Form 3115 to be attached to the taxpayer’s timely filed amended federal tax return for the year of change and a copy (with signature) of the Form 3115 to be filed with the national office no later than when the original Form 3115 is filed with the amended federal tax return for the year of change.

    4. For purposes of section 6.02(4)(a) of Rev. Proc. 2002-9, the taxpayer should include on line 1a of the Form 3115 (revised December 2003) the designated automatic accounting method change number for the change in method of accounting for depreciation made under this section 3. This number for this method change is 107.

.03 Taxpayer or property outside scope. If a taxpayer is precluded from using section 3 of this revenue procedure because the taxpayer or the item of depreciable property is outside the scope of section 3 of this revenue procedure (for example, the item of depreciable property was not disposed of by the taxpayer), any change in method of accounting for depreciation must be made in accordance with the requirements of Rev. Proc. 97-27, 1997-1 C.B. 680 (or its successor), or Rev. Proc. 2002-9 (or its successor), as applicable.

SECTION 4. WAIVER OF TWO-YEAR RULE IN REV. RUL. 90-38

.01 In general. If a taxpayer uses an impermissible method of determining depreciation for a depreciable property, the taxpayer adopts that method of accounting for the property when the taxpayer treats the property in the same way in determining gross income or deductions in two or more consecutively filed federal tax returns. Accordingly, the taxpayer changing from that impermissible method of accounting must file a Form 3115 in accordance with the requirements of § 1.446-1(e)(3)(i) and, as applicable, Rev. Proc. 97-27 or Rev. Proc. 2002-9. See Rev. Rul. 90-38.

.02 Waiver of two-year rule. Notwithstanding Rev. Rul. 90-38, a taxpayer may file a Form 3115 under Rev. Proc. 97-27 or Rev. Proc. 2002-9, as applicable, to change from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation under § 1.446-1(e)(2)(ii)(d) for any depreciable property subject to § 1.446-1(e)(2)(ii)(d) and placed in service by the taxpayer in the taxable year immediately preceding the year of change (as defined in section 5.02(2) of Rev. Proc. 97-27 or section 5.02 of Rev. Proc. 2002-9, as applicable) (hereinafter, this property is referred to as “1-year depreciable property”), provided the additional term and condition in section 4.03 of this revenue procedure is satisfied. Alternatively, the taxpayer may make the change from the impermissible depreciation method to the permissible depreciation method for the 1-year depreciable property by filing an amended federal tax return for the placed-in-service year prior to the date the taxpayer files its federal tax return for the taxable year succeeding the placed-in-service year.

.03 Additional term and condition for filing a Form 3115. In addition to the terms and conditions provided in Rev. Proc. 97-27 or Rev. Proc. 2002-9, as applicable, the § 481 adjustment reported on a Form 3115 that is filed by a taxpayer in accordance with section 4.02 of this revenue procedure to make a change in method of accounting for depreciation under § 1.446-1(e)(2)(ii)(d) for any 1-year depreciable property, must include the amount of any adjustment attributable to all property (including the 1-year depreciable property) subject to the Form 3115.

SECTION 5. EFFECT ON OTHER DOCUMENTS

.01 Rev. Proc. 2004-11 is clarified, modified, amplified, and superseded.

.02 The heading for section 2 of the APPENDIX of Rev. Proc. 2002-9 is modified to read as follows: “SECTION 2. DEPRECIATION OR AMORTIZATION (§ 56(a)(1), 56(g)(4)(A), 167, 168, 197, 1400I, 1400L, OR 1400N(d), OR FORMER § 168)”.

.03 Rev. Proc. 2002-9 (as modified by Rev. Proc. 2004-11) is modified by deleting sections 2.01, 2.02, 2B, and 2.05 of the APPENDIX and replacing them with the text in, respectively, sections 1, 2, 3, and 4 of the APPENDIX of this revenue procedure.

.04 Section 6.03 of Rev. Proc. 2000-38, 2000-2 C.B. 310, 313, is modified by deleting “See § 1.446-1(e)(2)(ii)(b).” and replacing it with “See § 1.446-1(e)(2)(ii)(d)(3)(i).”

.05 Section 8.01 of Rev. Proc. 2000-50, 2000-2 C.B. 601, is modified to read as follows: “A change in a taxpayer’s treatment of costs paid or incurred to develop, purchase, lease, or license computer software to a method described in section 5, 6, or 7 of this revenue procedure is a change in method of accounting to which §§ 446 and 481 apply. Further, a change in useful life under the method described in section 6.01(2) of this revenue procedure is a change in method of accounting to which §§ 446 and 481 apply. Additionally, if a taxpayer is currently treating costs paid or incurred to develop computer software under section 5.01(2) of this revenue procedure in accordance with the rules provided in § 167(f)(1) and the regulations thereunder but is not currently using a useful life of 36 months, a change in useful life to 36 months is a change in method of accounting to which §§ 446 and 481 apply. See § 1.446-1(e)(2)(ii)(d)(3)(i).

SECTION 6. EFFECTIVE DATE

.01 In general. Except as provided in sections 6.02, 6.03, and 6.04 of this revenue procedure, this revenue procedure is effective for a Form 3115 filed for taxable years ending on or after December 26, 2006.

.02 Transition rule for previously filed Forms 3115 for automatic consent.

  1. For a taxable year ending on or after December 26, 2006, a taxpayer may make a change in method of accounting previously authorized in section 2.01, 2.02, or 2B of the APPENDIX of Rev. Proc. 2002-9 in effect on the date on which the Form 3115 was filed with the national office by the taxpayer (see Rev. Proc. 2004-11) if:

    1. before December 26, 2006, the taxpayer filed a completed Form 3115 with the national office to make that change in method of accounting; and

    2. the taxpayer makes that change in method of accounting in compliance with all the applicable provisions of Rev. Proc. 2002-9 for the requested year of change (as defined in section 5.02 of Rev. Proc. 2002-9) on that Form 3115.

  2. If a taxpayer filed a Form 3115 with the national office to make a change in method of accounting previously authorized in section 2.01, 2.02, or 2B of the APPENDIX of Rev. Proc. 2002-9 in effect on the date on which the Form 3115 was filed with the national office by the taxpayer for a year of change for which this revenue procedure is effective (see section 6.01 of this revenue procedure) and the taxpayer’s original federal tax return for that year of change was not filed before December 26, 2006, the taxpayer may make the change in method of accounting authorized under section 2.01, 2.02, or 2B, as applicable, of the APPENDIX of Rev. Proc. 2002-9 as revised by this revenue procedure. However, the Service will process the Form 3115 in accordance with the section of the APPENDIX of Rev. Proc. 2002-9 in effect on the date on which the Form 3115 was filed with the national office by the taxpayer unless on or before the due date (including extensions) of the taxpayer’s federal tax return for the requested year of change (as defined in section 5.02 of Rev. Proc. 2002-9) on that Form 3115, the taxpayer completes a new Form 3115 to make the change under section 2.01, 2.02, or 2B, as applicable, of the APPENDIX of Rev. Proc. 2002-9 as revised by this revenue procedure and files this newly completed Form 3115 in duplicate in accordance with section 6.02(3)(a) of Rev. Proc. 2002-9. Additionally, the newly completed Form 3115 must include the statement: “Section [insert, as appropriate: 2.01, 2.02, or 2B] of the APPENDIX of Rev. Proc. 2002-9 as revised by Rev. Proc. 2007-16.” This statement must be legibly printed or typed on the appropriate line on, or at the top of page 1 of, the Form 3115.

.03 Application of section 3. Section 3 of this revenue procedure is effective for a Form 3115 filed on or after December 26, 2006.

.04 Changes made to Rev. Proc. 2000-50. The changes made in section 5.06 of this revenue procedure to section 8.01 of Rev. Proc. 2000-50 are effective for a Form 3115 filed for the taxable years ending on or after December 26, 2006, except that:

  1. the change made to section 8.01 of Rev. Proc. 2000-50 providing that a change in useful life under the method described in section 6.01(2) of Rev. Proc. 2000-50 is a change in method of accounting is effective for property placed in service by the taxpayer in a taxable year ending on or after December 30, 2003; and

  2. the change made to section 8.01 of Rev. Proc. 2000-50 providing that a change in useful life to 36 months made by a taxpayer that is currently treating costs paid or incurred to develop computer software under section 5.01(2) of Rev. Proc. 2000-50 in accordance with the rules provided in § 167(f)(1) and the regulations thereunder but is not currently using a useful life of 36 months is a change in method of accounting is effective for property placed in service by the taxpayer in a taxable year ending on or after December 30, 2003.

SECTION 7. DRAFTING INFORMATION

The principal author of this revenue procedure is Douglas H. Kim of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue procedure, contact Mr. Kim at (202) 622-3110 (not a toll-free call).


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